Time really is of the essence

Whilst the draft Regulations may change between now and the time they are laid before Parliament, this is not a consultation process. HMT intends to lay finalised Regulations before Parliament this Autumn. Once it has done so, there will be just 5 days to make submissions to the Joint Committee on Statutory Instruments (JCSI) which reports on the Regulations to the Commons/Lords. The JCSI has set itself a 10 day target to do this.

How will UK institutions continue to safeguard funds in banks outside the UK?

The new SIs are intended to ensure that Electronic Money Institutions (EMIs) and Payment Institutions (PIs) can continue to safeguard funds within the EEA (and elsewhere), by allowing EMIs and PIs to safeguard in any "approved foreign credit institution", namely: 

• the central bank in an OECD state;
• a bank that is regulated by an OECD state regulator; and
• any other bank that meets certain regulation, auditing, surplus revenue, minimum asset, and reporting criteria.

There are some minor differences between the definition that will be used in the Payment Services Regulations 2017 (PSRs) and in the Electronic Money Regulations 2011 (EMRs); reporting and surplus revenue criteria required for non-OECD banks under the EMRs are required for all types of banks under the PSRs. We suspect this is a drafting point that will be tidied up.

How has HMT tried to maximise the UK's chance of staying in SEPA?

Holding on to the SEPA Regulation

The Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018 (CTDDRs) keep an amended version of the SEPA Regulation, and amend the Payments in Euro (Credit Transfers and Direct Debits) Regulations 2012 so that SEPA rules will still apply to payments between the EEA and the UK.

Euro transactions via UK-EEA payment scheme still under PSRs

This point is further reflected in the amendments to the PSRs outlined in the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018 (EMPRs). Under that SI the PSRs would be amended to ensure that euro transactions executed between payment service providers in the UK and EEA through a payments scheme that covers that area are still treated as a "both legs in" transaction and subject to the full scope of the PSRs regime.

Fine-tuning required

There are some wrinkles that need to be ironed out before further versions of the Regulations are laid before Parliament. For example, in amending the territorial application of the PSRs to cater for UK/EEA Euro transactions through SEPA, non-Euro EEA currency transactions would seemingly be treated in the same way as non-EEA currency transactions (i.e. outside the scope of execution timing requirements altogether). This is a departure from the approach taken to date under the first and second Payment Services Directives.

Contingency for 'no-deal' scenario

Clearly the UK government can only do so much to secure continued SEPA participation and its approach relies on the EU making reciprocal changes to ensure the UK remains covered by SEPA from a European perspective too. If this is not the case, HMT has retained the power to change both sets of Regulations as necessary.

How can incoming firms continue to operate in the UK?

UK passporting regime removed for PIs and EMIs

The EMPRs do away with the UK passporting regime for PIs under the PSRs and EMIs under the EMRs altogether. There is one exception for Gibraltar based PIs/EMIs already passporting into the UK immediately before Brexit day, for whom this arrangement can continue.

3-year Temporary Permissions Regime (TPR)

Other incoming PIs and EMIs providing services in the UK immediately before Brexit day will be able to continue to do so as if authorised under the EMRs/PSRs for up to a maximum of 3 years (a "transitional authorisation"), provided the FCA is notified in accordance with the requirements of the "Temporary Permission Regimes" introduced for both PIs and EMIs. After that point, an EEA payment or e-money institution wishing to conduct its activity in the UK will need to be authorised by the FCA in its own right.

In the event it becomes necessary to rely on the proposed SIs, firms will have 3 months from Brexit day to notify the FCA.

Where a firm applies for authorisation in the UK, the TPR period will end the day before the authorisation is effective. If the FCA rejects the application the TPR period will end on the date stated in the rejection notice.

Post-TPR restriction for EMI authorised branches with non-UK head office

One point to note is that under the amended EMRs authorised branches of EMIs with their head office outside the UK will only be able to provide payment services that are related to e-money activity. EEA firms currently enjoying the broader flexibility of being able to carry out payment services under a passporting arrangement, and that may continue to do so under the TPR, will need to consider how this impacts their business if they seek authorisation as an EMI longer term. This will not apply in relation to a transitional authorisation, but will apply in relation to any application for authorisation during the TPR.

TPR regime for credit institutions

These TPR regimes proposed for PIs and EMIs will not apply to credit institutions providing payment and e-money services. These types of payment services provider will need to look to the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 (EEA Passport Rights Regulations), which covers entities passporting under the Financial Services and Markets Act 2000 (FSMA) (previously published in draft form on 24 July 2018 and updated last week). The EEA Passport Rights Regulations:

• remove references to the passporting framework set out in FSMA and in other UK legislation; and
• establish a 3-year temporary permissions regime to enable EEA firms currently operating in the UK using a passport to continue their activities in the UK after Brexit day. 

The regimes are similar; however, there are fewer details around the content of notifications and the period within which notifications must be made under the EEA Passport Rights Regulations and, unlike the EMPRs and CTDDRs, the bulk of the temporary permissions regime provisions in relation to FSMA regulated activities will come into force on the day after the day on which the Regulations are made, rather than Brexit day.

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